Caligan picks up a stake in Verona Pharma, seeing an opportunity to generate more value

Business: Verona Pharma, a clinical stage biopharmaceutical company, focuses on development and commercialization of therapies for the treatment of respiratory diseases with unmet medical needs. The company’s product candidate is ensifentrine, an inhaled and dual inhibitor of the phosphodiesterase (PDE) 3 and PDE4 enzymes that acts as both a bronchodilator and an anti-inflammatory agent in a single compound. This medication is in Phase 3 clinical trials for the treatment of chronic obstructive pulmonary disease, asthma and cystic fibrosis. The company is developing ensifentrine in three formulations, including nebulizer, dry powder inhaler and pressurized metered-dose inhaler. Verona Pharma was incorporated in 2005 and is headquartered in London.

Stock Market Value: ~$3.16B ($38.58 per share)

Ownership: n/a

Average Cost: n/a

Activist Commentary: Caligan Partners was founded by former Carlyle Group managing director David Johnson, and it launched its main fund in 2022. It invests in a concentrated portfolio of small and midcap life sciences companies, using activism as a tool to unlock value. Caligan looks for companies with differentiated intellectual property and durable assets that have underperformed their peers. The firm will take board seats when it thinks it can add value. The way the firm thinks about biopharma investing is somewhat unique. It looks for companies that are first in class and best in class in their therapies; companies where it has some downside protection; companies with a good management team; and opportunities where the firm thinks it could add value. Caligan looks to work constructively with boards and management but will not shy away from a proxy fight, if necessary.

On Oct. 22, Caligan announced that it has taken a position in Verona Pharma.

Verona Pharma is a clinical stage, pre-revenue, biopharmaceutical company that focuses on the development and commercialization of therapies for the treatment of respiratory diseases with unmet medical needs. The company’s current product candidate and potential value creator is ensifentrine (commercially “Ohtuvayre”), an inhaled and dual inhibitor that acts as both a bronchodilator and an anti-inflammatory agent. Ohtuvayre was recently approved by the FDA for maintenance treatment of chronic obstructive pulmonary disease (COPD) on June 26. Back in May 2022, prior to this approval and when Caligan began building their initial position, the stock was trading in the mid-single digits and at essentially cash value. With the commercial launch of Ohtuvayre, Verona’s first-ever marketed product, scheduled for the third quarter of 2024, the stock has soared. Still, Caligan thinks there is a lot more value to be realized.

COPD, known as “smoker’s lung,” is the third leading cause of death worldwide that affects over 380 million patients globally. Not only is this a humanitarian crisis, but a challenge for our health-care systems. In just the U.S. alone, over $24 billion in health-care costs are associated with COPD management. A successful drug like Ohtuvayre would not just increase the life expectancies of patients with COPD, but it would lower costs for both health-care providers and COPD patients. Currently, there are over 8.6 million U.S. COPD patients with over 4 million remaining symptomatic despite treatment from the current commercial therapies.

There is still a huge gap in this market, and Verona is currently on the trajectory of filling it with strong Phase III data showing a significant increase in lung function and a reduction in exacerbations with minimal side effects. This supporting data and the number of unsuccessfully treated patients in the current market suggests that Verona could achieve a 20% patient share for Ohtuvayre. If Verona can get 10% patient share, this could translate into $4.5 billion of revenue for Ohtuvayre. But the story gets even more exciting with potential indication expansion for utilizing Ohtuvayre for non-cystic fibrosis bronchiectasis (“NCFB”), a progressive inflammatory disease that causes permanent lung damage with no current approved therapies and whose symptoms mimic COPD. With a greater than 1 million patient population, this could be a huge avenue for expansion for Ohtuvayre if it were to get approved as an NCFB treatment. The only other potential player in the NCFB market is biopharma peer Insmed’s drug brensocatib. The drug had mediocre success, showing a 21% rate of reduction in exacerbations in Phase III testing. Still, this was enough to skyrocket Insmed’s valuation over $7 billion in one month. In early pooling analysis, Ohtuvayre showed a 41% reduction in exacerbations in COPD patients, almost double brensocatib.

When Caligan announced its Verona position last month, the stock was trading at $33.40 per share or a $2.5 billion enterprise value. If it can attain a 10% patient share for COPD and $4.5 billion of peak revenue, it is trading at one half of peak revenue. Mergers and acquisitions for similar companies are generally done at 3-times to 4-times peak revenue, which would give Verona a price of $115 per share. If Ohtuvayre continues to move through trials for NCFB and gets traction with patients, like Insmed, Caligan thinks that Verona Pharma could be worth 7-times its valuation, or $218 per share.

Caligan exclusively invests in the health-care sector and has seen a lot of success. In October 2023, Caligan announced an activist position in MorphoSys AG, a similarly modeled biopharma company with a Phase III drug, that was set to commercialize in Q4 of 2023. At the time, the stock was trading at 26.08 euros a share. After successfully commercializing its star drug pelabresib, MorphoSys was subsequently sold to Novartis in February 2024 for 2.7 billion euros or 68 euros per share. Caligan learned from that experience that if a drug can improve the standard of care for patients, it will be valuable. In an industry with $140 billion coming off patent relatively soon, larger pharma companies need to do acquisitions, and those deals are usually in the $1 billion to $10 billion range. Both of those points bode very well for Verona, Caligan’s largest position in its portfolio.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.